The earnings expectations game and the dispersion anomaly

Veenman, D. and Verwijmeren, P. (2022) The earnings expectations game and the dispersion anomaly. Management Science, 68(4), pp. 3129-3149. (doi: 10.1287/mnsc.2021.3983)

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Abstract

This study examines the role of differences in firms’ propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex ante measures of firms’ propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms’ participation in the earnings-expectations game provides a viable explanation for the dispersion anomaly.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: Veenman, D., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Management Science
Publisher:INFORMS
ISSN:0025-1909
ISSN (Online):1526-5501
Published Online:27 May 2021
Copyright Holders:Copyright © 2021 INFORMS
First Published:First published in Management Science 68(4): 3129-3149
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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